Nordic Capital Markets, Corporates and Investors in the Credit Crunch
by Thomas Begley, Senior Director & Head of Fixed Income, Debt Capital Markets and Timo Teinilä, Director & Head of Capital Structure and Credit Ratings Advisory, Nordea
Problems of de-personalised finance
Capital markets have always been a platform of innovation. Over the last 20-30 years this innovation was significantly driven by deregulation and technology. Deregulation encouraged new methods and tools of financial intermediation and their application to a wider range of issuers and investors. Communication technology allowed linking market participants ever faster so that new issuance and investment opportunities could be offered to a global audience. Increased computing power made it possible to handle greater volumes of data on new asset classes, and to slice and dice portfolios into a range of new and more complex products that fit different tastes for risk.
From a system where 'I invest into someone I know and understand' we have moved to a less personal system where 'I invest into what can be modelled.
More powerful computing and data transfer also allow to slice the credit process into different tasks that can then be subcontracted to various specialists: brokers originate assets, structurers and arrangers repackage them, servicers handle cash flows, various agents monitor their performance etc. All of this has had a profound impact of de-personalising finance. From a system where ‘I invest into someone I know and understand’ we have moved to a less personal system where ‘I invest into what can be modelled’.
This development has brought real benefits to participants in capital markets. It has broadened borrowers’ access to capital, and enabled investors to diversify their risks. Banks and other intermediaries have been able to pursue different business models that in their view best matched their strengths and ambitions. However, times of crisis reveal the weaknesses of the modern world of finance. The criticism includes:
- Agency conflicts - the growing number and specialisation of players involved in the markets means that they have different incentive structures than the ultimate investors, and thus may not have full interest in protecting the other participants in the markets. For example, structurers of collateralised securities are accused of being interested only in a rapid turnover of their asset inventories rather than carefully analysing their underlying quality in sufficient detail.
- Information asymmetries have accentuated because of the fact that it takes a high degree of skills to evaluate different types of relevant information on highly complex structures. This is the case, for example, with mortgage backed bonds, whose full evaluation requires not only sophisticated computer models, but also the input data for the models, and a solid qualitative understanding about the models’ parameters and of the origination process of the underlying assets.